Q: Do descriptive statements have a time and place in a credit write up? Some of the work I have done goes to board members that don't always know what they are looking at, so I use descriptive statements to better paint a picture for what they are looking at.
A: Descriptive statements play a critical role in a credit write-up since they state facts. An analytical statement explains the importance of the fact or facts. Without the analytical component, a descriptive statement is a statement of fact only that lacks an assessment of relevance or importance. We want to tie that relevance to one of the four essential issues - the borrowing causes, the cash sources of repayment, the risks to each cash source of repayment, and mitigants to the risks.
If the fact is not relevant to one or more of these four issues, it is a waste of time and effort to include it in the analytical section of the credit write-up.
But various facts may be important in providing background information about a borrower, its industry, and its competitive position. Even such facts can usually be linked to one or more of the essential issues. For example, if descriptive facts paint a borrower as a small player in a highly competitive industry, that may set the stage for thin margins, meager bottom-line profits, and collection delays – all of which point to difficulties in generating sufficient cash flow to meet debt service.
We offer a webinar on Description and Analysis in the Credit Write-Up which explores the critical linkage between descriptive and analytical statements in constructing an effective credit write-up.
Course overview: Guarantor Analysis, Global Cash Flow, and the Second Way Out